Battling Hedge Funds Fling Accusations

Oct 1 2007 | 2:35pm ET

It’s hedge fund vs. hedge fund, as one group of San Francisco funds has sued another, Jayhawk Capital Management, for a variety of dirty deeds done at their detriment.

Primarius Capital, the general partner for a quartet of hedge funds, has commenced an arbitration proceeding against Prairie Village, Kan.-based Jayhawk, three funds it manages and Kent McCarthy, Jayhawk’s head and a Goldman Sachs veteran.

According to Primarius’ complaint, McCarthy tricked Primarius into associating with his firm, becoming its investment advisor and research analyst and promising to sell the firm’s funds on his good name. But Primarius alleges that McCarthy misused his relationship with the Primarius funds, instead conspiring to use the Primarius hedge funds for his own, unlawful ends.

“The great majority of hedge funds are managed professionally and ethically, but the investors of such funds suffer in an environment that includes a handful of predatory, unethical managers and advisors who think of themselves as above the law, especially given that hedge funds are not as strictly regulated as many other investment vehicles,” Phillip Heller, a lawyer for Primarius, said. “The time has come for ethical fund managers to take a stand against the improper practices of these few bad apples.”

Jayhawk denies Primarius' claims, and said the San Francisco firm is the one with things to answer for.

"Their claims are meritless; we've held that from the very beginning," Jim McMullen, Jayhawk’s general counsel, told FINalternatives. "Their suit was a preemptive one. They knew Jayhawk would be bringing suit for failure to redeem. They are holding our money hostage."

Primarius charges that McCarthy, who also teaches at the University of Kansas, would pump and dump securities at Primarius’ detriment and front-ran against Primarius’ China hedge fund, all the while keeping Primarius in the dark. Primarius says that his actions contributed to the evaporation of the firm’s assets; $160 million just three years ago, the Primarius funds now manage just $75 million.

According to McMullen, Jayhawk accounted for 83% of the invested capital in Primarius' China fund. "Somehow, we would have been engaged in a complicated scheme to harm a business in which we were the vast majority shareholder. It's a little ridiculous."

Heller alleges, McCarthy’s penchant for untruthfulness has not abated: “It has come to our attention that Kent McCarthy, or someone else acting on behalf of Jayhawk, has been telling investors that the case has been settled, which is false,” he said. “The case has not been settled. These statements constitute a cover-up, and possible additional violations of the securities laws.”

McMullen alleges that Primarius' suit was filed in spite of arbitration clauses in the agreements between the two firms.

“Once it became apparent that they were going to lose [their case in federal court], they agreed to arbitration,” McMullen told FINalternatives. As for Heller’s allegation that Jayhawk has misled investors about the status of the case, he says, “All we told them is that it moved from federal court to arbitration.”

"I've never dealt with a lawyer who conducts himself this way," McMullen says of Heller, calling the press release "desperate."

"They only issued this press release to try to harm us in the public marketplace," he adds. "Some people do business this way. That's not the way our organization operates."

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